Revealed: How mobile phone giants Vodafone and EE are among the big names dodging their UK tax bills

British mobile phone giant Vodafone
this weekend unleashed a multi-million pound marketing blitz to make
sure it is not eclipsed by the launch of fourth-generation mobile
services by rival Everything Everywhere – owner of Orange and T-Mobile –
next week.

At the same time, but rather more
quietly, Vodafone’s controversial Luxembourg finance subsidiary was
filing accounts showing how the multinational shifts its profits around
to get the lowest tax rates.

Vodafone’s complicated Luxembourg
arrangements kicked off a public debate about corporate taxation two
years ago when protest group UK Uncut highlighted a deal struck with
Revenue & Customs over the subsidiary’s tax obligations.

On the move: Vodafone shifts its profits around to get the lowest tax rates

The row over the amount of tax
multinationals pay in Britain has since engulfed some of the biggest
brand names – including Apple, Google, eBay, Starbucks, Walkers and
Cadbury.

Financial Mail can reveal that EE
also pays no corporation tax in this country. And investigations show
that more and more of the biggest private equity-owned companies are
avoiding billions of pounds in tax as a result of complex debt
arrangements.

The Luxembourg finance arm is well
away from the glitz of Vodafone’s UK operation, but it helps to pay for
it. Vodafone Investments Luxembourg received interest income and
dividends from the group’s subsidiaries of almost ten billion euros (£8
billion) in 2011 – and paid tax of only 3.7 million euros.

Put simply it works like this – the
German arm of Vodafone takes a loan from the Luxembourg company, the
interest on which it can offset against its German corporation tax bill.
The interest accrues in Luxembourg at virtually zero rates.

‘Luxembourg charges a “net worth” tax
on the value of the balance sheet, rather than corporation tax,’ a tax
expert told Financial Mail. That net worth tax charge is arranged with
local authorities and can be very low.

The Luxembourg subsidiary was at the
centre of a legal battle with Revenue & Customs over whether it was
simply a ruse to avoid UK tax. Vodafone settled the dispute by paying
£1.25 billion to the taxman in 2010 – but critics said it should have
been as high as £6 billion.

It is unclear how much interest the
Luxembourg arm received in 2011 and how much of the ten billion euros
was cash from dividends, which would not be taxable even under UK tax
rules.

Vodafone said: ‘There has never been
any reduction in Vodafone Group’s tax contributions to the UK Exchequer
as a consequence of these arrangements, and HMRC has always been
entirely aware of our operations in Luxembourg and all other territories
of relevance.’

The company argues, like EE, that
having paid a huge sum in the Government auction for spectrum to run its
services, it is now entirely legally offsetting that investment against
current earnings.

EE’s latest results show it has not
paid a penny in corporation tax in Britain.Like Starbucks, which last
week said its UK business was performing badly to deflect accusations of
tax avoidance, EE has achieved the trick by not making any money.

EE had annual sales of £6.8 billion
in the year to the end of December, 2011, but it reported a loss before
tax of £113 million.

Big technology companies have more
complicated arrangements. Financial Mail revealed in April that Google,
Apple, eBay, Facebook and Amazon avoided £650 million in tax in 2010 by
routing payments from consumers through tax havens. All said they were
compliant with tax rules, except for Apple, which declined to comment.

Consumer goods companies have also
faced questions about their arrangements. The Walkers crisp brand –
which features Gary Lineker in its adverts – were transferred by US
owner PepsiCo to a Swiss subsidiary in 1999.

By moving the brand to low-tax
Switzerland, the company wiped out much of its profits – and tax bill –
by turning the UK arm into nothing more than a contract manufacturer,
paid a fee just larger that its costs.

PepsiCo eventually paid £40 million
to the British taxman in 2008 to settle a dispute over the move,
according to reports. The company said at the time: ‘PepsiCo manages its
tax affairs in a prudent and lawful manner.’

Cadbury, owned by US giant Kraft, is
in the process of restructuring its operations in a similar way so that
profits are recorded in Switzerland rather than in Britain.

Meanwhile, private equity firms are
escaping billions of pounds of tax liabilities by structuring their
businesses like Vodafone. Bain Capital, the former employer of US
presidential hopeful Mitt Romney, bought hospital and school food
supplier Brake Bros in 2007. The £1.4 billion deal was structured so the
holding company based in the UK, Cucina Lux Investments, borrowed via
companies based in overseas tax havens.

Finance charges – interest on the
debt – as high as £180 million pushed the UK company into a significant
loss. Cucina’s parent, Cucina (BC) Luxco Sarl, is based in Luxembourg
and the investment is controlled via two shell companies set up in the
Cayman Islands. This has allowed them to escape between £75 million and
£100 million in tax over the past five years, according to analysis by
Financial Mail.

Financial Mail revealed in May that
the owners of Boots, which include billionaire industrialist Stefano
Pessina, his partner Ornella Barra and private equity giant KKR, have
escaped tax payments of up to £500 million in the past five years.

Other firms that have structured
deals in this way include Permira with its acquisition of Birds Eye
Group Iglo and fashion retailer New Look.

Bain said the reduced tax was not
related to Brakes’ overseas connections but to its investment in the
business and interest repayments. Permira was unavailable for comment.

All of the structures set up by
multinationals are perfectly legal – but they are also starting to test
the patience of the British public.